Commercial mortgage spreads increase in Canada

CMLS Financial, one of Canada’s largest, independently owned mortgage services companies, has released their latest Commercial Mortgage Commentary, an in-depth analysis of the commercial mortgage market in Canada.

Commercial Mortgages : After a nearly 3-year period of declining commercial mortgage spreads, a significant shift took place as spreads rose sharply at the end of 2018 and beginning of 2019. In total, spread over GOC increased approximately 40 bps from Dec 2018 to Feb 2019.

However, according to CMLS Financial Q1/2019 Canadian Commercial Mortgage Lenders Sentiment Survey, most participants believe spreads will decline in the foreseeable future. Commercial spreads have started to ease at the end of Q1, with 5-year deals for top quality assets pricing at 170 to 190 bps above GOC.

The liquidity premium of commercial mortgage spreads over BBB-rated corporate spreads declined sharply in the latter part of 2018. This premium for 5-year loans started 2019 at 25 bps, but by the end of Q1, had risen back to 68 bps, slightly above the long-term average of 65 bps. The quick recovery of the commercial mortgageliquidity premium was a result of both a rise in commercial mortgage spreads and a drop in corporate spreads over GOC.

CMHC : CMHC-insured mortgages are a popular financing option for apartment owners because of their low interest rates relative to non-government backed mortgages. The insured spreads have been relatively flat throughout Q1, with current spreads ranging from 85 bps to 95 bps for large, good quality assets. Most CMHC-insured lenders securitize loans using the NHA MBS and CMB programs. As a result, lenders quote spreads over the CMB rate, as opposed to the GOC yield. Through Q1/2019, the 5-year and 10-year CMB yield over GOC decreased from 42 bps to 40 bps and 55 bps to 46 bps, respectively. The lower CMB spread generally results in a lower overall credit spread over GOCs.

CMHC-insured multi-family properties can be securitized in two NHA MBS pools: the 965 pool, which is comprised of fixed rate loans that allow prepayment with penalty; and the 966 pool, which does not allow prepayments. The pools have increased significantly year-over-year, with the combined amount going from $1.8 billion in Q1/2018 to $2.7 billion in Q1/2019.

CMBS : In early April, the first CMBS issuance of 2019 has realized. Real Estate Asset Liquidity Trust issued REAL-T 2019-HBC, a $250-million CMBS comprised of 2 loans secured by Hudson’s Bay stand-alone department stores located in Montreal and Ottawa. REAL 2019- HBC features a 4.229% weighted average interest rate, a 48-month weighted average term and AAA subordination of 16.875%. The LTC ratio is 46.7% due to the significant amount of cash equity ($252 million) behind the subject loan.

Senior Unsecured Debt : Senior Unsecured debt for REITs and REOCs is often an attractive substitute for conventional commercial mortgage financing. In Q1/2019, senior unsecured debt issuance reached $1.175 billion, up from $1 billion in Q4/18. Brookfield Property issued a $350-million, 5-year debenture at a spread of 280.4 bps, which was 50 bps higher than their equal term issuance in Q3/2018.

First Mortgage Bonds : The First Mortgage bond market saw its first activity since Q1/2018 with an aggregate $660-million bond on the Bay Wellington Tower in Toronto. The tower features 47-storeys and 1.4 million square feet, with a LEED Gold certification. Issued by Brookfield Office Properties, the bond is comprised of $270 million Series A: 7-year, 3.299% coupon and $390 million Series B: 10-year, 3.464% coupon. Both series feature a 5-year interest only period and a 30-year amortization.

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